Why People Pay for Subscription Entertainment Services

By Aarthi Rayapura • September 13, 2016

By Karen Allen

I’ve been giving a lot of thought to subscription entertainment services and why people will or won’t pay for them. This is a question we in the digital music space have been grappling with for the better part of the last ten years. Setting aside piracy for the moment and looking purely at sales, we lost physical sales to download sales first. Overall sales were down, but at least people were still paying for whole albums and singles via iTunes. More recently, we’ve been losing downloads to streaming, which is also a revenue-generating model for rightsholders but with strikingly lower overall revenue than downloads. Within streaming, the rate of paying users pales in comparison to the ones using the ad-supported services. It’s imperative that we turn that around.

At the same time, video content services have been trying their hand at paid subscription services. Netflix was the first in, followed by Hulu, Amazon Instant Video, YouTube Red, Qello, and others. Some video services didn’t even bother with charging and are simply ad-supported, such as Baeble, Crackle, Go90, etc. Despite having name brand content, the only ones who seem to have a significant number of paying users are Hulu and Netflix. One could argue also Amazon Instant Video, but that is a benefit for Amazon Prime subscribers, so you can’t assume that people would have subscribed to it solely (indeed, you can now but it’s cheaper to get Prime).

This all seemed understandable. In an internet full of entertainment options, many of them already free, it’s tough to get people to open their wallets.

Then came along livestreaming. Periscope broke the platform open to the masses, but Twitch was in first and making a ton of money for themselves and their users. So much so, they were bought by Amazon in 2015 for $800M. I’ll say that again. A livestream service where people stream whatever they’re doing (in this case playing video games) and people watch and comment and pay for the service in various ways, was sold for $800 million.

This challenges what we know about what compels people to pay for online content and, by extension, what they consider to be content worth paying for. On one end they’re paying for premium TV shows and movies with little complaint (Netflix, Hulu). On the other end, they’re paying for amateur content from amateur broadcasters voluntarily and willingly (Twitch), when even YouTube stars with huge followings are having a hard time getting their fans to pay for content (YouTube Red). Everything in the middle seems to be a slog, even when the content is “premium.”

I started really looking at each of the services, what they offer, their revenue models, and how users are responding to them. I’ve come to some theories about what users are really paying for and what low-earning services are missing.

When People Will Pay for Premium Content: People pay for premium content when it replaces an existing behavior at a lower price and with equal or greater convenience.

When People Will Pay for Non-Premium Content:People will pay for non-premium content when they feel they have a highly personal stake in it and are a direct part of it. It’s this direct relationship that makes it worth paying for in their minds. This is when users make the connection between enjoying content and the need to support the creator.